PARSONS CORP - Quarter Report: 2023 June (Form 10-Q)

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(in years)

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10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2023

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-07782

Parsons Corporation

(Exact Name of Registrant as Specified in its Charter)


Delaware	95-3232481
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

5875 Trinity Parkway #300 Centreville, Virginia	20120
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (703) 988-8500

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading

Symbol(s)

Name of each exchange on which registered

Common Stock, $1 par value

PSN

New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of July 19, 2023, the registrant had 104,885,334 shares of common stock, $1.00 par value per share, outstanding.

Table of Contents


		Page
PART I.	FINANCIAL INFORMATION	1
Item 1.	Financial Statements (Unaudited)	1
	Consolidated Balance Sheets	1
	Consolidated Statements of Income	2
	Consolidated Statements of Comprehensive Income	3
	Consolidated Statements of Cash Flows	4
	Consolidated Statements of Shareholders’ Equity	5
	Notes to Unaudited Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	40
Item 4.	Controls and Procedures	40
PART II.	OTHER INFORMATION	42
Item 1.	Legal Proceedings	42
Item 1A.	Risk Factors	42
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	42
Item 3.	Defaults Upon Senior Securities	42
Item 4.	Mine Safety Disclosures	42
Item 5.	Other Information	43
Item 6.	Exhibits	43
	Signatures	44

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

PARSONS CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets

(in thousands, except share information)


		June 30, 2023			December 31, 2022
		(Unaudited)
Assets
Current assets:
	Cash and cash equivalents (including $83,101 and $53,193 Cash of consolidated joint ventures)	$	178,589		$	262,539
	Accounts receivable, net (including $266,312 and $217,419 Accounts receivable of consolidated joint ventures, net)		949,493			717,345
	Contract assets (including $9,983 and $11,313 Contract assets of consolidated joint ventures)		712,413			634,033
	Prepaid expenses and other current assets (including $15,546 and $7,913 Prepaid expenses and other current assets of consolidated joint ventures)		139,713			105,866
	Total current assets		1,980,208			1,719,783

	Property and equipment, net (including $3,345 and $2,543 Property and equipment of consolidated joint ventures, net)		95,266			96,050
	Right of use assets, operating leases (including $6,596 and $6,315 Right of use assets, operating leases of consolidated joint ventures)		166,797			155,090
	Goodwill		1,692,725			1,661,850
	Investments in and advances to unconsolidated joint ventures		118,861			107,425
	Intangible assets, net		240,300			254,127
	Deferred tax assets		144,782			137,709
	Other noncurrent assets		68,568			66,108
	Total assets	$	4,507,507		$	4,198,142

Liabilities and Shareholders' Equity
Current liabilities:
	Accounts payable (including $49,508 and $49,078 Accounts payable of consolidated joint ventures)	$	237,229		$	201,428
	Accrued expenses and other current liabilities (including $144,256 and $102,417 Accrued expenses and other current liabilities of consolidated joint ventures)		693,662			630,193
	Contract liabilities (including $45,552 and $40,654 Contract liabilities of consolidated joint ventures)		292,404			213,064
	Short-term lease liabilities, operating leases (including $3,197 and $2,552 Short-term lease liabilities, operating leases of consolidated joint ventures)		57,085			59,144
	Income taxes payable		14,521			4,290
	Total current liabilities		1,294,901			1,108,119

	Long-term employee incentives		18,142			17,375
	Long-term debt		744,777			743,605
	Long-term lease liabilities, operating leases (including $3,399 and $3,763 Long-term lease liabilities, operating leases of consolidated joint ventures)		128,634			111,417
	Deferred tax liabilities		20,024			12,471
	Other long-term liabilities		110,263			109,220
	Total liabilities		2,316,741			2,102,207
Contingencies (Note 12)
Shareholders' equity:
	Common stock, $1 par value; authorized 1,000,000,000 shares; 146,311,866 and 146,132,016 shares issued; 43,665,289 and 40,960,845 public shares outstanding; 61,217,557 and 63,742,151 ESOP shares outstanding		146,312			146,132
	Treasury stock, 41,429,020 shares at cost		(844,936	)		(844,936	)
	Additional paid-in capital		2,721,402			2,717,134
	Retained earnings		111,513			43,089
	Accumulated other comprehensive loss		(14,860	)		(17,849	)
	Total Parsons Corporation shareholders' equity		2,119,431			2,043,570
	Noncontrolling interests		71,335			52,365
	Total shareholders' equity		2,190,766			2,095,935
	Total liabilities and shareholders' equity	$	4,507,507		$	4,198,142

The accompanying notes are an integral part of these consolidated financial statements.

PARSONS CORPORATION AND SUBSIDIARIES

Consolidated Statements of Income

(In thousands, except per share information)

(Unaudited)


	For the Three Months Ended						For the Six Months Ended
	June 30, 2023			June 30, 2022			June 30, 2023			June 30, 2022
Revenue	$	1,356,486		$	1,008,721		$	2,529,952		$	1,957,790
Direct cost of contracts		1,068,220			781,772			1,985,408			1,515,672
Equity in (losses) earnings of unconsolidated joint ventures		75			5,613			(5,765	)		11,211
Selling, general and administrative expenses		211,897			199,932			411,205			385,009
Operating income		76,444			32,630			127,574			68,320
Interest income		306			171			1,099			236
Interest expense		(7,299	)		(4,525	)		(13,757	)		(8,463	)
Other income (expense), net		543			236			1,857			381
Total other income (expense)		(6,450	)		(4,118	)		(10,801	)		(7,846	)
Income before income tax expense		69,994			28,512			116,773			60,474
Income tax expense		(15,223	)		(5,732	)		(26,726	)		(13,851	)
Net income including noncontrolling interests		54,771			22,780			90,047			46,623
Net income attributable to noncontrolling interests		(11,530	)		(4,485	)		(21,253	)		(7,661	)
Net income attributable to Parsons Corporation	$	43,241		$	18,295		$	68,794		$	38,962
Earnings per share:
Basic	$	0.41		$	0.18		$	0.66		$	0.38
Diluted	$	0.38		$	0.17		$	0.61		$	0.35

The accompanying notes are an integral part of these consolidated financial statements.

PARSONS CORPORATION AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(In thousands)

(Unaudited)


	For the Three Months Ended						For the Six Months Ended
	June 30, 2023			June 30, 2022			June 30, 2023			June 30, 2022
Net income including noncontrolling interests	$	54,771		$	22,780		$	90,047		$	46,623
Other comprehensive income, net of tax
Foreign currency translation adjustment, net of tax		3,152			(5,383	)		2,975			(2,509	)
Pension adjustments, net of tax		16			(47	)		17			(25	)
Comprehensive income including noncontrolling interests, net of tax		57,939			17,350			93,039			44,089
Comprehensive income attributable to noncontrolling interests, net of tax		(11,533	)		(4,482	)		(21,256	)		(7,659	)
Comprehensive income attributable to Parsons Corporation, net of tax	$	46,406		$	12,868		$	71,783		$	36,430

The accompanying notes are an integral part of these consolidated financial statements.

PARSONS CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In thousands) (Unaudited)


		For the Six Months Ended
		June 30, 2023			June 30, 2022
Cash flows from operating activities:
	Net income including noncontrolling interests	$	90,047		$	46,623
	Adjustments to reconcile net income to net cash used in operating activities
	Depreciation and amortization		57,048			61,090
	Amortization of debt issue costs		1,414			1,302
	Loss (gain) on disposal of property and equipment		43			(96	)
	Provision for doubtful accounts		91			(3	)
	Deferred taxes		(5,220	)		(2,149	)
	Foreign currency transaction gains and losses		230			1,461
	Equity in losses (earnings) of unconsolidated joint ventures		5,765			(11,211	)
	Return on investments in unconsolidated joint ventures		9,313			19,434
	Stock-based compensation		15,978			8,358
	Contributions of treasury stock		29,167			26,544
	Changes in assets and liabilities, net of acquisitions and newly consolidated joint ventures:
	Accounts receivable		(227,756	)		(109,681	)
	Contract assets		(78,254	)		(17,866	)
	Prepaid expenses and other assets		(40,899	)		(3,521	)
	Accounts payable		35,043			(8,079	)
	Accrued expenses and other current liabilities		33,336			(7,314	)
	Contract liabilities		76,522			13,360
	Income taxes		10,309			3,107
	Other long-term liabilities		1,809			3,977
	Net cash provided by operating activities		13,986			25,336
Cash flows from investing activities:
	Capital expenditures		(17,956	)		(13,588	)
	Proceeds from sale of property and equipment		65			251
	Payments for acquisitions, net of cash acquired		(42,273	)		(379,272	)
	Investments in unconsolidated joint ventures		(24,507	)		(11,228	)
	Return of investments in unconsolidated joint ventures		72			-
	Proceeds from sales of investments in unconsolidated joint ventures		381			-
	Net cash used in investing activities		(84,218	)		(403,837	)
Cash flows from financing activities:
	Proceeds from borrowings		187,400			347,100
	Repayments of borrowings		(187,400	)		(147,100	)
	Payments for acquired warrants		-			(11,243	)
	Contributions by noncontrolling interests		200			2,827
	Distributions to noncontrolling interests		(2,487	)		(10,344	)
	Repurchases of common stock		(8,000	)		(15,548	)
	Taxes paid on vested stock		(6,838	)		(5,963	)
	Proceeds from issuance of common stock		2,940			2,724
	Net cash (used in) provided by financing activities		(14,185	)		162,453
	Effect of exchange rate changes		467			(963	)
	Net decrease in cash, cash equivalents, and restricted cash		(83,950	)		(217,011	)
	Cash, cash equivalents and restricted cash:
	Beginning of year		262,539			343,883
	End of period	$	178,589		$	126,872

The accompanying notes are an integral part of these consolidated financial statements.

PARSONS CORPORATION AND SUBSIDIARIES

Consolidated Statements of Shareholders’ Equity

For the Three Months Ended June 30, 2023 and June 30, 2022

(In thousands)

(Unaudited)


	Common Stock			Treasury Stock			Additional Paid-in Capital			Retained Earnings (Accumulated Deficit)			Accumulated Other Comprehensive Income (Loss)			Total Parsons Equity			Noncontrolling Interests			Total
Balance at March 31, 2023	$	146,244		$	(844,936	)	$	2,712,167		$	68,429		$	(18,025	)	$	2,063,879		$	61,651		$	2,125,530
Comprehensive income
Net income		-			-			-			43,241			-			43,241			11,530			54,771
Foreign currency translation gain, net		-			-			-			-			3,149			3,149			3			3,152
Pension adjustments, net		-			-			-			-			16			16			-			16
Distributions		-			-			-			-			-			-			(1,849	)		(1,849	)
Issuance of equity securities, net of retirements		114			-			2,203			(157	)		-			2,160			-			2,160
Repurchases of common stock		(46	)		-			(1,954	)		-			-			(2,000	)		-			(2,000	)
Stock-based compensation		-			-			8,986			-			-			8,986			-			8,986
Balance at June 30, 2023	$	146,312		$	(844,936	)	$	2,721,402		$	111,513		$	(14,860	)	$	2,119,431		$	71,335		$	2,190,766


Balance at March 31, 2022	$	146,348		$	(867,391	)	$	2,678,761		$	(32,858	)	$	(6,673	)	$	1,918,187		$	32,438		$	1,950,625
Comprehensive income
Net income		-			-			-			18,295			-			18,295			4,485			22,780
Foreign currency translation loss, net		-			-			-			-			(5,380	)		(5,380	)		(3	)		(5,383	)
Pension adjustments, net		-			-			-			-			(47	)		(47	)		-			(47	)
Contributions		-			-			-			-			-			-			1,601			1,601
Distributions		-			-			-			-			-			-			(2,035	)		(2,035	)
Issuance of equity securities, net of retirements		102			-			2,566			(2	)		-			2,666			-			2,666
Repurchases of common stock		(276	)		-			(9,724	)		-			-			(10,000	)		-			(10,000	)
Stock-based compensation		-			-			4,460			-			-			4,460			-			4,460
Balance at June 30, 2022	$	146,174		$	(867,391	)	$	2,676,063		$	(14,565	)	$	(12,100	)	$	1,928,181		$	36,486		$	1,964,667

The accompanying notes are an integral part of these consolidated financial statements.

PARSONS CORPORATION AND SUBSIDIARIES

Consolidated Statements of Shareholders’ Equity

For the six Months Ended June 30, 2023 and June 30, 2022

(In thousands)

(Unaudited)


	Common Stock			Treasury Stock			Additional Paid-in Capital			Retained Earnings (Accumulated Deficit)			Accumulated Other Comprehensive Income (Loss)			Total Parsons Equity			Noncontrolling Interests			Total
Balance at December 31, 2022	$	146,132		$	(844,936	)	$	2,717,134		$	43,089		$	(17,849	)	$	2,043,570		$	52,365		$	2,095,935
Comprehensive income
Net income		-			-			-			68,794			-			68,794			21,253			90,047
Foreign currency translation gain, net		-			-			-			-			2,972			2,972			3			2,975
Pension adjustments, net		-			-			-			-			17			17			-			17
Contributions		-			-			-			-			-			-			200			200
Distributions		-			-			-			-			-			-			(2,487	)		(2,487	)
Issuance of equity securities, net of retirement		365			-			(3,895	)		(370	)		-			(3,900	)		-			(3,900	)
Repurchases of common stock		(185	)		-			(7,815	)		-			-			(8,000	)					(8,000	)
Stock-based compensation		-			-			15,978			-			-			15,978			-			15,978
Balance at June 30, 2023	$	146,312		$	(844,936	)	$	2,721,402		$	111,513		$	(14,860	)	$	2,119,431		$	71,335		$	2,190,766


Balance at December 31, 2021	$	146,277		$	(867,391	)	$	2,684,979		$	(53,529	)	$	(9,568	)	$	1,900,768		$	36,344		$	1,937,112
Comprehensive income
Net income		-			-			-			38,962			-			38,962			7,661			46,623
Foreign currency translation loss, net		-			-			-			-			(2,507	)		(2,507	)		(2	)		(2,509	)
Pension adjustments, net		-			-			-			-			(25	)		(25	)		-			(25	)
Contributions		-			-			-			-			-			-			2,827			2,827
Distributions		-			-			-			-			-			-			(10,344	)		(10,344	)
Issuance of equity securities, net of retirement		324			-			(2,153	)		2			-			(1,827	)		-			(1,827	)
Repurchases of common stock		(427	)		-			(15,121	)		-			-			(15,548	)		-			(15,548	)
Stock-based compensation		-			-			8,358			-			-			8,358			-			8,358
Balance at June 30, 2022	$	146,174		$	(867,391	)	$	2,676,063		$	(14,565	)	$	(12,100	)	$	1,928,181		$	36,486		$	1,964,667

The accompanying notes are an integral part of these consolidated financial statements.

Parsons Corporation and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

Description of Operations

Organization

Parsons Corporation, a Delaware corporation, and its subsidiaries (collectively, the “Company”) provide sophisticated design, engineering and technical services, and smart and agile software to the United States federal government and Critical Infrastructure customers worldwide. The Company performs work in various foreign countries through local subsidiaries, joint ventures and foreign offices maintained to carry out specific projects.

Basis of Presentation and Principles of Consolidation

The accompanying unaudited consolidated financial statements and related notes of the Company have been prepared in accordance with generally accepted accounting principles in the United States of America ("GAAP") and pursuant to the interim period reporting requirements of Form 10-Q. They do not include all of the information and footnotes required by GAAP for complete financial statements and, therefore, should be read in conjunction with our consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.

In the opinion of management, the consolidated financial statements reflect all normal recurring adjustments necessary for a fair statement of the financial position, results of operations and cash flows for the interim periods presented. The results of operations and cash flows for any interim period are not necessarily indicative of results for the full year or for future years.

This Quarterly Report on Form 10-Q includes the accounts of Parsons Corporation and its subsidiaries and affiliates which it controls. Interests in joint ventures that are controlled by the Company, or for which the Company is otherwise deemed to be the primary beneficiary, are consolidated. For joint ventures in which the Company does not have a controlling interest, but exerts a significant influence, the Company applies the equity method of accounting (see “Note 14 – Investments in and Advances to Joint Ventures" for further discussion). Intercompany accounts and transactions are eliminated in consolidation.

Use of Estimates

The preparation of the consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual amounts could differ from those estimates. The Company’s most significant estimates and judgments involve revenue recognition with respect to the determination of the costs to complete contracts and transaction price; determination of self-insurance reserves; useful lives of property and equipment and intangible assets; valuation of goodwill, intangible assets and net assets acquired from business acquisitions; valuation of deferred income tax assets and uncertain tax positions, among others. Please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” and “Note 2—Summary of Significant Accounting Policies” in the notes to our consolidated financial statements included in the Company’s Form 10-K for the year ended December 31, 2022, for a discussion of the significant estimates and assumptions affecting our consolidated financial statements. Estimates of costs to complete contracts are continually evaluated as work progresses and are revised when necessary. When a change in estimate is determined to have an impact on contract profit, the Company records a positive or negative adjustment to the consolidated statement of income.

New Accounting Pronouncements

In the first quarter of 2022, the Company early adopted ASU No. 2021-08, “Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers”. The new guidance requires that the approach of ASC 606, Revenue from Contracts with Customers, should be used to measure an acquired revenue contract in a business combination. This guidance is to be applied (1) retrospectively to all business combinations for which the acquisition date occurs on or after the beginning of the fiscal year that includes the interim period of early

application and (2) prospectively to all business combinations that occur on or after the date of initial application. The early adoption of ASU 2021-08 did not have a material impact on the consolidated financial statements.

Acquisitions

IPKeys Power Partners

On April 13, 2023, the Company entered into a merger agreement to acquire a 100% ownership interest in IPKeys Power Partners (“IPKeys”), a privately-owned company, for $43.4 million from cash on hand. The merger brings IPKeys' established customer base, expanding Parsons' presence in two rapidly growing end markets: grid modernization and cyber resiliency for critical infrastructure. Headquartered in Tinton Falls, New Jersey, IPKeys is a trusted provider of enterprise software platform solutions that is actively delivering cyber and operational security to hundreds of electric, water, and gas utilities across North America. In connection with this acquisition, the Company recognized $0.4 million and $0.7 million of acquisition-related expenses in “Selling, general and administrative expense” in the consolidated statements of income for the three and six months ended June 30, 2023, respectively, including legal fees, consulting fees, and other miscellaneous direct expenses associated with the acquisition.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed based on the preliminary purchase price allocation as of the date of acquisition (in thousands):


	Amount
Cash and cash equivalents	$	126
Accounts receivable		3,937
Contract assets		823
Other current assets		464
Property and equipment		142
Right of use asset		129
Goodwill		25,008
Intangible assets		22,300
Accounts payable		(543	)
Accrued expenses and other current liabilities		(1,821	)
Contract liabilities		(1,936	)
Deferred tax liabilities		(5,257	)
Net assets acquired	$	43,372

Of the total purchase price, the following values were preliminarily assigned to intangible assets (in thousands, except for years):

(1)

The acquired business is a SaaS commercial business. Backlog for this type of business is included as customer relationships.

Amortization expense of $0.4 million related to these intangible assets was recorded for the three and six months ended June 30, 2023. The entire value of goodwill was assigned to the Critical Infrastructure reporting unit and represents synergies expected to be realized from this business combination. $1.0 million of goodwill is deductible for tax purposes.

The amount of revenue generated by IPKeys and included within consolidated revenues is $2.6 million for the three and six months ended June 30, 2023. The Company has determined that the presentation of net income from the date of acquisition is impracticable due to the integration of general corporate functions upon acquisition.

The Company is still in the process of finalizing its valuation of the net assets acquired.

Supplemental Pro Forma Information (Unaudited)

Supplemental information of unaudited pro forma operating results assuming the IPKeys acquisition had been consummated as of the beginning of fiscal year 2022 (in thousands) is as follows:


	Three Months Ended				Six Months Ended
	June 30, 2023		June 30, 2022		June 30, 2023		June 30, 2022
Pro forma Revenue	$	1,356,486	$	1,011,689	$	2,532,807	$	1,963,865
Pro forma Net Income including noncontrolling interests		56,355		22,052	$	91,730	$	44,338

Xator Corporation

On May 31, 2022, the Company acquired a 100% ownership interest in Xator Corporation (“Xator”), a privately-owned company, for $387.5 million in cash. The Company borrowed $300 million under the Credit Agreement, as described in “Note 10 – Debt and Credit Facilities”, to partially fund the acquisition. Xator expands Parsons’ customer base and brings differentiated technical capabilities in critical infrastructure protection, counter-unmanned aircraft systems (cUAS), intelligence and cyber solutions, biometrics, and global threat assessment and operations. In connection with this acquisition, the Company recognized $7.7 million of acquisition-related expenses in “Selling, general and administrative expense” in the consolidated statements of income for the year ended December 31, 2022, including legal fees, consulting fees, and other miscellaneous direct expenses associated with the acquisition.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed based on the purchase price allocation as of the date of acquisition (in thousands):


	Amount
Cash and cash equivalents	$	8,935
Accounts receivable		7,393
Contract assets		24,332
Prepaid expenses and other current assets		3,615
Property and equipment		1,699
Right of use assets, operating leases		7,517
Goodwill		257,934
Investments in and advances to unconsolidated joint ventures		698
Intangible assets		123,500
Other noncurrent assets		9,156
Accounts payable		(6,626	)
Accrued expenses and other current liabilities		(31,309	)
Contract liabilities		(2,631	)
Short-term lease liabilities, operating leases		(2,371	)
Long-term lease liabilities, operating leases		(5,146	)
Other long-term liabilities		(9,156	)
Net assets acquired	$	387,540

Of the total purchase price, the following values were assigned to intangible assets (in thousands, except for years):


	Gross Carrying Amount		Amortization Period
			(in years)
Customer relationships	$	37,000	15
Backlog		81,000	6
Trade name		4,000	1
Developed technologies		1,000	3
Non-compete agreements		500	3

Amortization expense of $4.8 million and $9.9 million related to these intangible assets was recorded for the three and six months ended June 30, 2023, respectively and $1.6 million for both the three and six months ended June 30, 2022. The entire value of goodwill was assigned to the Federal Solutions reporting unit and represents synergies expected to be realized from this business combination. Goodwill in its entirety is deductible for tax purposes.

The amount of revenue generated by Xator and included within consolidated revenues is $193.7 million and $306.2 million for the three and six months ended June 30, 2023, respectively and $20.8 million for both the three and six months ended June 30, 2022. The Company has determined that the presentation of net income from the date of acquisition is impracticable due to the integration of general corporate functions upon acquisition.

Supplemental Pro Forma Information (Unaudited)

Supplemental information of unaudited pro forma operating results assuming the Xator acquisition had been consummated as of the beginning of fiscal year 2021 (in thousands) is as follows:


	Three Months Ended				Six Months Ended
	June 30, 2023		June 30, 2022		June 30, 2023		June 30, 2022
Pro forma Revenue	$	1,356,486	$	1,048,894	$	2,529,952	$	2,064,966
Pro forma Net Income including noncontrolling interests		56,452		31,591		94,026		58,890

Contracts with Customers

Disaggregation of Revenue

The Company’s contracts contain both fixed-price and cost reimbursable components. Contract types are based on the component that represents the majority of the contract. The following table presents revenue disaggregated by contract type (in thousands):


	Three Months Ended				Six Months Ended
	June 30, 2023		June 30, 2022		June 30, 2023		June 30, 2022
Fixed-Price	$	440,094	$	279,408	$	781,106	$	519,982
Time-and-Materials		324,033		271,330		642,348		534,645
Cost-Plus		592,359		457,983		1,106,498		903,163
Total	$	1,356,486	$	1,008,721	$	2,529,952	$	1,957,790

See “Note 18 – Segments Information” for the Company’s revenues by business lines.

Contract Assets and Contract Liabilities

Contract assets and contract liabilities balances at June 30, 2023 and December 31, 2022 were as follows (in thousands):


	June 30, 2023		December 31, 2022		$ change			% change
Contract assets	$	712,413	$	634,033	$	78,380			12.4	%
Contract liabilities		292,404		213,064		79,340			37.2	%
Net contract assets (liabilities) (1)	$	420,009	$	420,969	$	(960	)		-0.2	%

(1)

Total contract retentions included in net contract assets (liabilities) were $71.6 million as of June 30, 2023, of which $36.5 million are not expected to be paid in the next 12 months. Total contract retentions included in net contract assets (liabilities) were $73.5 million as of December 31, 2022. Contract assets at June 30, 2023 and December 31, 2022 include $107.5 million and $95.7 million, respectively, related to net claim recovery estimates. For the three and six months ended June 30, 2023 and June 30, 2022, there were no material losses recognized related to the collectability of claims, unapproved change orders, and requests for equitable adjustment.

During the three months ended June 30, 2023 and June 30, 2022, the Company recognized revenue of $29.6 million and $18.6 million, respectively, and $107.7 million and $81.7 million during the six months ended June 30, 2023 and June 30, 2022, respectively, that was included in the corresponding contract liability balances at December 31, 2022 and December 31, 2021, respectively. Certain changes in contract assets and contract liabilities consisted of the following:


	June 30, 2023			December 31, 2022
Acquired contract assets	$	(242	)	$	25,397
Acquired contract liabilities		2,487			2,080

There was no significant impairment of contract assets recognized during the six months ended June 30, 2023 and June 30, 2022.

Revisions in estimates, such as changes in estimated claims or incentives, related to performance obligations partially satisfied in previous periods that individually had an impact of $5 million or more on revenue resulted in the following changes in revenue:


	Three Months Ended				Six Months Ended
	June 30, 2023		June 30, 2022		June 30, 2023		June 30, 2022
Revenue impact, net	$	20,168	$	-	$	20,339	$	-

In addition to the revenue impacts in the table above, there was a change in estimate impact to direct costs of contracts of $24.7 million for both the three and six months ended June 30, 2023, related to a write-down on a contract in the Critical Infrastructure segment. This same contract had a $4.0 million revenue impact for a net $20.7 million impact. These cost and revenue adjustments decreased operating income by $0.6 million and $1.1 million, net income by $0.5 million and $0.8 million and diluted earnings per share of $0.00 and $0.01 for the three and six months ended June 30, 2023, respectively.

Accounts Receivable, net

Accounts receivable, net consisted of the following as of June 30, 2023 and December 31, 2022 (in thousands):


	2023			2022
Billed	$	649,866		$	502,411
Unbilled		303,730			218,945
Total accounts receivable, gross		953,596			721,356
Allowance for doubtful accounts		(4,103	)		(4,011	)
Total accounts receivable, net	$	949,493		$	717,345

Billed accounts receivable represents amounts billed to clients that have not been collected. Unbilled accounts receivable represents amounts where the Company has a present contractual right to bill but an invoice has not been issued to the customer at the period-end date.

The allowance for doubtful accounts was determined based on consideration of trends in actual and forecasted credit quality of clients, including delinquency and payment history, type of client, such as a government agency or commercial sector client, and general economic conditions and particular industry conditions that may affect a client’s ability to pay.

Transaction Price Allocated to the Remaining Unsatisfied Performance Obligations

The Company’s remaining unsatisfied performance obligations (“RUPO”) as of June 30, 2023 represent a measure of the total dollar value of work to be performed on contracts awarded and in-progress. The Company had $6.0 billion in RUPO as of June 30, 2023.

RUPO will increase with awards of new contracts and decrease as the Company performs work and recognizes revenue on existing contracts. Projects are included within RUPO at such time the project is awarded and agreement on contract terms has been reached. The difference between RUPO and backlog relates to unexercised option years that are included within backlog and the value of Indefinite Delivery/Indefinite Quantity (“IDIQ”) contracts included in backlog for which delivery orders have not been issued.

RUPO is comprised of: (a) original transaction price, (b) change orders for which written confirmations from our customers have been received, (c) pending change orders for which the Company expects to receive confirmations in the ordinary course of business, and (d) claim amounts that the Company has made against customers for which it has

determined that it has a legal basis under existing contractual arrangements and a significant reversal of revenue is not probable, less revenue recognized to-date.

The Company expects to satisfy its RUPO as of June 30, 2023 over the following periods (in thousands):


Period RUPO Will Be Satisfied	Within One Year		Within One to Two Years		Thereafter
Federal Solutions	$	1,453,480	$	330,069	$	316,720
Critical Infrastructure		1,846,139		964,377		1,123,973
Total	$	3,299,619	$	1,294,446	$	1,440,693

Leases

The Company has operating and finance leases for corporate and project office spaces, vehicles, heavy machinery and office equipment. Our leases have remaining lease terms of one to nine years, some of which may include options to extend the leases for up to five years, and some of which may include options to terminate the leases after the third year.

The components of lease costs for the three and six months ended June 30, 2023 and June 30, 2022 are as follows (in thousands):


	Three Months Ended						Six Months Ended
	June 30, 2023			June 30, 2022			June 30, 2023			June 30, 2022
Operating lease cost	$	17,129		$	16,574		$	33,754		$	32,750
Short-term lease cost		3,396			3,610			7,059			7,090
Amortization of right-of-use assets		670			602			1,186			1,150
Interest on lease liabilities		65			22			98			43
Sublease income		(1,239	)		(968	)		(2,363	)		(2,003	)
Total lease cost	$	20,021		$	19,840		$	39,734		$	39,030

Supplemental cash flow information related to leases for the six months ended June 30, 2023 and June 30, 2022 is as follows (in thousands):


	Six Months Ended
	June 30, 2023		June 30, 2022
Operating cash flows for operating leases	$	35,076	$	34,727
Operating cash flows for finance leases		98		43
Financing cash flows from finance leases		1,166		1,054
Right-of-use assets obtained in exchange for new operating lease liabilities		43,398		10,583
Right-of-use assets obtained in exchange for new finance lease liabilities	$	3,412	$	631

Supplemental balance sheet and other information related to leases as of June 30, 2023 and December 31, 2022 are as follows (in thousands):


	June 30, 2023			December 31, 2022
Operating Leases:
Right-of-use assets	$	166,797		$	155,090
Lease liabilities:
Current		57,085			59,144
Long-term		128,634			111,417
Total operating lease liabilities	$	185,719		$	170,561
Finance Leases:
Other noncurrent assets	$	6,222		$	3,965
Accrued expenses and other current liabilities	$	2,232		$	1,746
Other long-term liabilities	$	3,963		$	2,246

Weighted Average Remaining Lease Term:
Operating leases	4.1 years			3.6 years
Finance leases	3 years			2.6 years
Weighted Average Discount Rate:
Operating leases		3.9	%		3.4	%
Finance leases		4.0	%		2.8	%

As of June 30, 2023, the Company has no operating leases that have not yet commenced.

A maturity analysis of the future undiscounted cash flows associated with the Company’s operating and finance lease liabilities as of June 30, 2023 is as follows (in thousands):


	Operating Leases			Finance Leases
2023 (remaining)	$	33,551		$	1,290
2024		56,056			2,234
2025		43,696			1,771
2026		27,856			1,128
2027		16,243			181
Thereafter		24,134			-
Total lease payments		201,536			6,604
Less: imputed interest		(15,817	)		(409	)
Total present value of lease liabilities	$	185,719		$	6,195

Goodwill

The following table summarizes the changes in the carrying value of goodwill by reporting segment from December 31, 2022 to June 30, 2023 (in thousands):


	December 31, 2022		Acquisitions		Foreign Exchange		June 30, 2023
Federal Solutions	$	1,591,563	$	4,744	$	-	$	1,596,307
Critical Infrastructure		70,287		25,008		1,123		96,418
Total	$	1,661,850	$	29,752	$	1,123	$	1,692,725

The Company performed a qualitative triggering analysis and determined there was no triggering event indicating a potential impairment to the carrying value of its goodwill at June 30, 2023 and concluded there has not been an impairment.

Intangible Assets

The gross amount and accumulated amortization of intangible assets with finite useful lives included in “Intangible assets, net” on the consolidated balance sheets are as follows (in thousands except for years):


	June 30, 2023							December 31, 2022							Weighted Average
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Amortization Period (in years)
Backlog	$	142,200	$	(62,852	)	$	79,348	$	142,200	$	(45,903	)	$	96,297		4
Customer relationships		313,720		(165,825	)		147,895		293,730		(146,032	)		147,698		9
Leases		120		(97	)		23		120		(87	)		33		1
Developed technology		23,400		(13,054	)		10,346		16,600		(11,560	)		5,040		6
Trade name		-		-			-		5,000		(3,083	)		1,917		1
Non-compete agreements		3,350		(2,581	)		769		3,350		(2,074	)		1,276		3
In process research and development		1,800		-			1,800		1,800		-			1,800	n/a
Other intangibles		330		(211	)		119		275		(209	)		66		10
Total intangible assets	$	484,920	$	(244,620	)	$	240,300	$	463,075	$	(208,948	)	$	254,127

The aggregate amortization expense of intangible assets for the three months ended June 30, 2023 and June 30, 2022 was $18.1 million and $19.7 million, respectively, and $36.1 million and $39.8 million for the six months ended June 30, 2023 and June 30, 2022, respectively.

Estimated amortization expense for the remainder of the current fiscal year, each of the next four years and beyond is as follows (in thousands):


	June 30, 2023
2023	$	33,448
2024		36,970
2025		31,377
2026		27,797
2027		26,880
Thereafter		82,028
Total	$	238,500

Property and Equipment, Net

Property and equipment consisted of the following at June 30, 2023 and December 31, 2022 (in thousands):


	June 30, 2023			December 31, 2022			Useful life (years)
Buildings and leasehold improvements	$	105,671		$	103,071		1-15
Furniture and equipment		87,552			85,088		3-10
Computer systems and equipment		162,823			152,511		3-10
Construction equipment		5,361			5,271		5-7
Construction in progress		21,833			21,952
		383,240			367,893
Accumulated depreciation		(287,974	)		(271,843	)
Property and equipment, net	$	95,266		$	96,050

Depreciation expense for the three months ended June 30, 2023 and June 30, 2022 was $9.5 million and $9.9 million, respectively, and $18.9 million and $19.6 million for the six months ended June 30, 2023 and June 30, 2022, respectively.

10.

Debt and Credit Facilities

Debt consisted of the following (in thousands):


	June 30, 2023			December 31, 2022
Long-Term Debt:
Delayed draw term loan	$	350,000		$	350,000
Convertible senior notes		400,000			400,000
Revolving credit facility		-			-
Debt issuance costs		(5,223	)		(6,395	)
Total	$	744,777		$	743,605

Delayed Draw Term Loan

In September 2022, the Company entered into a $350 million unsecured Delayed Draw Term Loan with an increase option of up to $150 million (the “2022 Delayed Draw Term Loan”). Proceeds of the 2022 Delayed Draw Term Loan Agreement may be used (a) to pay off in full, or partially payoff, the Company’s existing Senior Notes, (b) to prepay revolving loans outstanding under the Revolving Credit Agreement (as defined below), or (c) for working capital, capital expenditures and other lawful corporate purposes. The Company drew $350.0 million from the 2022 Delayed Draw Term Loan in November 2022. The Company incurred $0.9 million of debt issuance costs in connection with the delayed draw term loan as of December 31, 2022. These costs are presented as a direct deduction from long-term debt on the face of the balance sheet. Interest expense related to the Delayed Draw Term Loan was $5.6 million and $10.7 million for the three and six months ended June 30, 2023, respectively. The amortization of debt issuance costs and interest expense is recorded in “Interest expense” on the consolidated statements of income. As of June 30, 2023 and December 31, 2022, there was $350.0 million outstanding under the Delayed Draw Term Loan. The interest rates on June 30, 2023 and December 31, 2022 were 6.5% and 5.7%, respectively.

The 2022 Delayed Draw Term Loan has a three-year maturity and permits the Company to borrow in U.S. dollars. The 2022 Delayed Draw Term Loan does not require any amortization payments by the Company. Depending on the Company’s consolidated leverage ratio (or debt rating after such time as the Company has such rating), borrowings under the 2022 Delayed Draw Term Loan Agreement will bear interest at either an adjusted Term SOFR benchmark rate plus a margin between 0.875% and 1.500% or a base rate plus a margin of between 0% and 0.500% and will initially bear interest at the middle of this range. The Company will pay a ticking fee on unused term loan commitments at a rate of 0.175% commencing with the date that is ninety (90) days after the Closing Date. Amounts outstanding under the 2022 Delayed Draw Term Loan Agreement may be prepaid at the option of the Company without premium or penalty, subject to customary breakage fees in connection with the prepayment of benchmark rate loans.

Convertible Senior Notes

In August 2020, the Company issued an aggregate $400.0 million of 0.25% Convertible Senior Notes due 2025, including the exercise of a $50.0 million initial purchasers’ option. The Company received proceeds from the issuance and sale of the Convertible Senior Notes of $389.7 million, net of $10.3 million of transaction fees and other third-party offering expenses. The Convertible Senior Notes accrue interest at a rate of 0.25% per annum, payable semi-annually on February 15 and August 15 of each year beginning on February 15, 2021, and will mature on August 15, 2025, unless earlier repurchased, redeemed or converted.

The Convertible Senior Notes are the Company’s senior unsecured obligations and will rank senior in right of payment to any of the Company’s indebtedness that is expressly subordinated in right of payment to the Notes; equal in right of payment to any of the Company’s unsecured indebtedness that is not so subordinated; effectively junior in right of payment to any of the Company’s secured indebtedness, to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness and other liabilities (including trade payables) of the Company’s subsidiaries

Each $1,000 of principal of the Notes will initially be convertible into 22.2913 shares of our common stock, which is equivalent to an initial conversion price of $44.86 per share, subject to adjustment upon the occurrence of specified events. On or after March 15, 2025 until the close of business on the second scheduled trading day immediately preceding the maturity date of the Convertible Senior Notes, holders may convert all or a portion of their Convertible Senior Notes, regardless of the conditions below.

Prior to the close of business on the business day immediately preceding March 15, 2025, the Notes will be convertible at the option of the holders thereof only under the following circumstances:

•

during any calendar quarter commencing after the calendar quarter ending on December 31, 2021, if the last reported sale price of the Company’s common stock for at least 20 trading days, whether or not consecutive, during a period of 30 consecutive trading days ending on, and including the last trading day of the immediately preceding calendar quarter, is greater than or equal to 130% of the conversion price on each applicable trading day;

•

during the five business day period after any five consecutive trading day period in which, for each trading day of that period, the trading price per $1,000 principal amount of Convertible Senior Notes for such trading day was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such trading day;

•

if the Company calls such Convertible Senior Notes for redemption; or

•

upon the occurrence of specified corporate events described in the Indenture.

The Company may redeem all or any portion of the Convertible Senior Notes for cash, at its option, on or after August 21, 2023 and before the 51st scheduled trading day immediately before the maturity date at a redemption price equal to 100% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest, but only if the last reported sale price per share of the Company’s common stock exceeds 130% of the conversion price for a specified period of time. In addition, calling any Convertible Senior Note for redemption will constitute a Make-Whole Fundamental Change with respect to that Convertible Senior Note, in which case the conversion rate applicable to the conversion of that Convertible Senior Note will be increased in certain circumstances if it is converted after it is called for redemption.

Upon the occurrence of a fundamental change prior to the maturity date of the Convertible Senior Notes, holders of the Convertible Senior Notes may require the Company to repurchase all or a portion of the Convertible Senior Notes for cash at a price equal to 100% of the principal amount of the Convertible Senior Notes to be repurchased, plus any accrued and unpaid interest to, but excluding, the fundamental change repurchase date.

Upon conversion, the Company may settle the Convertible Senior Notes for cash, shares of the Company’s common stock, or a combination thereof, at the Company’s option. If the Company satisfies its conversion obligation solely in cash or through payment and delivery of a combination of cash and shares of the Company’s common stock, the amount of cash and shares of common stock due upon conversion will be based on a daily conversion value calculated on a proportionate basis for each trading day in a 50-trading day observation period.

The Company recognized interest expense of approximately $0.7 million for both the three months ended June 30, 2023 and June 30, 2022 and $1.5 million for both the six months ended June 30, 2023 and June 30, 2022. As of June 30, 2023 and December 31, 2022, the carrying value of the Notes was $400.0 million.

Revolving Credit Facility

In June 2021, the Company entered into a $650 million unsecured revolving credit facility (the “Credit Agreement”). The Company incurred $1.9 million of costs in connection with this Credit Agreement. The 2021 Credit Agreement replaced an existing Fifth Amended and Restated Credit Agreement dated as of November 15, 2017. Under the new agreement, the Company’s revolving credit facility was increased from $550 million to $650 million. The credit facility has a five-year maturity, which may be extended up to two times for periods determined by the Company and the applicable extending lenders, and permits the Company to borrow in U.S. dollars, certain specified foreign currencies, and each other currency that may be approved in accordance with the 2021 Facility. The borrowings under the Credit Agreement bear interest at either the Term SOFR rate plus a margin between 1.0% and 1.625% or a base rate (as defined in the Credit Agreement) plus a margin of between 0% and 0.625%. The rates on June 30, 2023 and December 31, 2022 were 8.5% and 5.7%, respectively. Borrowings under this Credit Agreement are guaranteed by certain Company operating subsidiaries. Letters of credit commitments outstanding under this agreement aggregated to $43.9 million and $44.5 million at March 31, 2023 and December 31, 2022, respectively, which reduced borrowing limits available to the Company. Interest expense related to the Credit Agreement was $0.3 million and $0.8 million for the three months ended June 30, 2023 and June 30, 2022, respectively and $0.5 million and $0.9 million for the six months ended June 30, 2023 and June 30, 2022, respectively. There were no loan amounts outstanding under the Credit Agreement at June 30, 2023.

The Credit Agreement includes various covenants, including restrictions on indebtedness, liens, acquisitions, investments or dispositions, payment of dividends and maintenance of certain financial ratios and conditions. The Company was in compliance with these covenants at June 30, 2023 and December 31, 2022.

Letters of Credit

The Company also has in place several secondary bank credit lines for issuing letters of credit, principally for foreign contracts, to support performance and completion guarantees. Letters of credit commitments outstanding under these bank lines aggregated approximately $243.0 million and $222.5 million at June 30, 2023 and December 31, 2022, respectively.

Convertible Note Hedge and Warrant Transactions

In connection with the sale of the Convertible Senior Notes, the Company purchased a bond hedge designed to mitigate the potential dilution from the conversion of the Convertible Senior Notes. Under the five-year term of the bond hedge, upon a conversion of the bonds, the Company will receive the number of shares of common stock equal to the remaining common stock deliverable upon conversion of the Convertible Senior Notes if the conversion value exceeds the principal amount of the Notes. The aggregate number of shares that the Company could be obligated to issue upon conversion of the Convertible Senior Notes is approximately 8.9 million shares. The cost of the convertible note hedge transactions was $55.0 million.

The cost of the convertible note hedge was partially offset by the Company’s sale of warrants to acquire approximately 8.9 million shares of the Company’s common stock. The warrants were initially exercisable at a price of at least $66.46 per share and are subject to customary adjustments upon the occurrence of certain events, such as the payment of dividends. The Company received $13.8 million in cash proceeds from the sales of these warrants.

The bond hedge and warrant transactions effectively increased the conversion price associated with the Convertible Senior Notes during the term of these transactions from 35%, or $44.86, to 100%, or $66.46, at their issuance, thereby reducing the dilutive economic effect to shareholders upon actual conversion.

The bond hedges and warrants are indexed to, and potentially settled in, shares of the Company’s common stock. The net cost of $41.2 million for the purchase of the bond hedges and sale of the warrants was recorded as a reduction to additional paid-in capital in the consolidated balance sheets.

At issuance, the Company recorded a deferred tax liability of $16.2 million related to the Convertible Senior Notes debt discount and the capitalized debt issuance costs. The Company also recorded a deferred tax asset of $16.5 million related to the convertible note hedge transactions and the tax basis of the capitalized debt issuance costs through additional paid-in capital. The deferred tax liability and deferred tax asset were included net in “Deferred tax assets” on the consolidated balance sheets. Upon adoption of ASU 2020-06, the Company reversed the deferred tax liability of $13.9 million that the Company had recorded at issuance related to the Convertible Senior Note debt discount and recorded an additional deferred tax liability of $0.4 million related to the capitalized debt issuance costs. In addition, the Company recorded a $0.9 million adjustment to the deferred tax asset through retained earnings related to the tax effect of book accretion recorded in 2020 and reversed upon adoption.

11.

Income Taxes

The Company’s effective tax rate was 21.8% and 20.1% and income tax expense was $15.2 million and $5.7 million for the three months ended June 30, 2023 and June 30, 2022, respectively. The change in the effective tax rate was due primarily to an increase in foreign withholding taxes, partially offset by tax benefits related to increases in the foreign-derived intangible income (FDII) deduction, and untaxed income attributed to noncontrolling interests. The Company’s effective tax rate was 22.9% for both the six months ended June 30, 2023 and June 30, 2022 and income tax expense was $26.7 million and $13.9 million for the six months ended June 30, 2023 and June 30, 2022, respectively. The most significant items contributing to the change in the effective tax rate relate to an increase in tax benefits related to increases in the FDII deduction, and untaxed income attributed to noncontrolling interests, offset by an increase in foreign withholding taxes. The difference between the effective tax rate and the statutory U.S. Federal income tax rate of 21% for the three and six months ended June 30, 2023 primarily relates to state income taxes and foreign withholding taxes, partially offset by benefits related to untaxed income attributable to noncontrolling interests, earnings in lower tax jurisdictions, the FDII deduction, and the federal research tax credit.

As of June 30, 2023, the Company’s deferred tax assets were subject to a valuation allowance of $28.7 million primarily related to foreign net operating loss carryforwards, foreign tax credit carryforwards, and capital losses that the Company has determined are not more-likely-than-not to be realized. The factors used to assess the likelihood of realization include: the past performance of the entities, forecasts of future taxable income, future reversals of existing taxable temporary differences, and available tax planning strategies that could be implemented to realize the deferred tax assets. The ability or failure to achieve the forecasted taxable income in these entities could affect the ultimate realization of deferred tax assets.

As of June 30, 2023 and December 31, 2022, the liability for income taxes associated with uncertain tax positions was $22.1 million and $22.8 million, respectively. It is reasonably possible that the Company may realize a decrease in our uncertain tax positions of approximately $1.5 million during the next 12 months as a result of concluding various tax audits and closing tax years.

Although the Company believes its reserves for its tax positions are reasonable, the final outcome of tax audits could be materially different, both favorably and unfavorably. It is reasonably possible that certain audits may conclude in the next 12 months and that the unrecognized tax benefits the Company has recorded in relation to these tax years may change compared to the liabilities recorded for these periods. However, it is not currently possible to estimate the amount, if any, of such change.

12.

Contingencies

The Company is subject to certain lawsuits, claims and assessments that arise in the ordinary course of business. Additionally, the Company has been named as a defendant in lawsuits alleging personal injuries as a result of contact with asbestos products at various project sites. Management believes that any significant costs relating to these claims will be reimbursed by applicable insurance and, although there can be no assurance that these matters will be resolved favorably, management believes that the ultimate resolution of any of these claims will not have a material adverse effect on our consolidated financial position, results of operations, or cash flows. A liability is recorded when it is both probable that a loss has been incurred and the amount of loss or range of loss can be reasonably estimated. When using a range of loss estimate, the Company records the liability using the low end of the range unless some amount within the range of loss appears at that time to be a better estimate than any other amount in the range. The Company records a corresponding receivable for costs covered under its insurance policies. Management judgment is required to determine the outcome and the estimated amount of a loss related to such matters. Management believes that there are no claims or assessments outstanding which would materially affect the consolidated results of operations or the Company’s financial position.

In September 2015, a former Parsons employee filed an action in the United States District Court for the Northern District of Alabama against us as a qui tam relator on behalf of the United States (the “Relator”) alleging violation of the False Claims Act. The plaintiff alleges that, as a result of these actions, the United States paid in excess of $1 million per month between February and September 2006 that it should have paid to another contractor, plus $2.9 million to acquire vehicles for the contractor defendant to perform its security services. The lawsuit sought (i) that we cease and desist from violating the False Claims Act, (ii) monetary damages equal to three times the amount of damages that the United States has sustained because of our alleged violations, plus a civil penalty of not less than $5,500 and not more than $11,000 for each alleged violation of the False Claims Act, (iii) monetary damages equal to the maximum amount allowed pursuant to §3730(d) of the False Claims Act, and (iv) Relator’s costs for this action, including recovery of attorneys’ fees and costs incurred in the lawsuit. The United States government did not intervene in this matter as it is allowed to do so under the statute. Dispositive and/or pre-trail motions have been filed. A hearing date has not yet been scheduled for hearing such motions. Depending upon the court’s rulings upon such motions, a trial will may be scheduled in 2023 or 2024.

Federal government contracts are subject to audits, which are performed for the most part by the Defense Contract Audit Agency (“DCAA”). Audits by the DCAA and other agencies consist of reviews of our overhead rates, operating systems and cost proposals to ensure that we account for such costs in accordance with the Cost Accounting Standards (“CAS”). If the DCAA determines we have not accounted for such costs in accordance with the CAS, the DCAA may disallow these costs. The disallowance of such costs may result in a reduction of revenue and additional liability for the Company. Historically, the Company has not experienced any material disallowed costs as a result of government audits. However, the Company can provide no assurance that the DCAA or other government audits will not result in material disallowances for incurred costs in the future. All audits of costs incurred on work performed through 2013 have been closed, and years thereafter remain open.

Although there can be no assurance that these matters will be resolved favorably, management believes that their ultimate resolution will not have a material adverse impact on the Company’s consolidated financial position, results of operations, or cash flows.

13.

Retirement Benefit Plan

The Company’s principal retirement benefit plan is the Parsons Employee Stock Ownership Plan (“ESOP”), a stock bonus plan, established in 1975 to cover eligible employees of the Company and certain affiliated companies. Contributions of treasury stock to the ESOP are made annually in amounts determined by the Company’s board of directors and are held in trust for the sole benefit of the participants. Shares allocated to a participant’s account are fully vested after three years of credited service, or in the event(s) of reaching age 65, death or disability while an active employee of the Company. As of June 30, 2023 and December 31, 2022, total shares of the Company’s common stock outstanding were 104,882,846 and 104,702,996, respectively, of which 61,217,557 and 63,742,151, respectively, were held by the ESOP.

A participant’s interest in their ESOP account is redeemable upon certain events, including retirement, death, termination due to permanent disability, a severe financial hardship following termination of employment, certain conflicts of interest following termination of employment, or the exercise of diversification rights. Distributions from the ESOP of participants’ interests are made in the Company’s common stock based on quoted prices of a share of the Company’s common stock on the NYSE. A participant will be able to sell such shares of common stock in the market, subject to any requirements of the federal securities laws.

Total ESOP contribution expense was $14.7 million and $13.5 million for the three months ended June 30, 2023 and June 30, 2022, respectively and $29.2 million and $26.5 million for the six months ended June 30, 2023 and June 30, 2022, respectively. The expense is recorded in “Direct costs of contracts” and “Selling, general and administrative expense” in the consolidated statements of income. The fiscal 2023 ESOP contribution has not yet been made. The amount is currently included in accrued liabilities.

14.

Investments in and Advances to Joint Ventures

The Company participates in joint ventures to bid, negotiate and complete specific projects. The Company is required to consolidate these joint ventures if it holds the majority voting interest or if the Company meets the criteria under the consolidation model, as described below.

The Company performs an analysis to determine whether its variable interests give the Company a controlling financial interest in a Variable Interest Entity (“VIE”) for which the Company is the primary beneficiary and should, therefore, be consolidated. Such analysis requires the Company to assess whether it has the power to direct the activities of the VIE and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE.

The Company analyzed all of its joint ventures and classified them into two groups: (1) joint ventures that must be consolidated because they are either not VIEs and the Company holds the majority voting interest, or because they are VIEs and the Company is the primary beneficiary; and (2) joint ventures that do not need to be consolidated because they are either not VIEs and the Company holds a minority voting interest, or because they are VIEs and the Company is not the primary beneficiary.

Many of the Company’s joint venture agreements provide for capital calls to fund operations, as necessary; however, such funding is infrequent and is not anticipated to be material.

Letters of credit outstanding described in “Note 10 – Debt and Credit Facilities” that relate to project ventures are $116.7 million and $106.8 million at June 30, 2023 and December 31, 2022.

In the table below, aggregated financial information relating to the Company’s joint ventures is provided because their nature, risk and reward characteristics are similar. None of the Company’s current joint ventures that meet the characteristics of a VIE are individually significant to the consolidated financial statements.

Consolidated Joint Ventures

The following represents financial information for consolidated joint ventures included in the consolidated financial statements (in thousands):


	June 30, 2023		December 31, 2022
Current assets	$	374,942	$	289,837
Noncurrent assets		10,401		9,961
Total assets		385,343		299,798
Current liabilities		242,530		194,701
Noncurrent liabilities		3,399		3,763
Total liabilities		245,929		198,464
Total joint venture equity	$	139,414	$	101,334


	Three Months Ended				Six Months Ended
	June 30, 2023		June 30, 2022		June 30, 2023		June 30, 2022
Revenue	$	167,253	$	108,089	$	328,737	$	203,623
Costs		143,808		98,761		285,406		187,603
Net income	$	23,445	$	9,328	$	43,331	$	16,020
Net income attributable to noncontrolling interests	$	11,530	$	4,485	$	21,253	$	7,661

The assets of the consolidated joint ventures are restricted for use only by the particular joint venture and are not available for the Company’s general operations.

Unconsolidated Joint Ventures

The Company accounts for its unconsolidated joint ventures using the equity method of accounting. Under this method, the Company recognizes its proportionate share of the net earnings of these joint ventures as “Equity in (losses) earnings of unconsolidated joint ventures” in the consolidated statements of income. The Company’s maximum exposure to loss as a result of its investments in unconsolidated joint ventures is typically limited to the aggregate of the carrying value of the investment and future funding commitments.

The following represents the financial information of the Company’s unconsolidated joint ventures as presented in their unaudited financial statements (in thousands):


	June 30, 2023		December 31, 2022
Current assets	$	1,470,305	$	1,610,246
Noncurrent assets		492,597		491,658
Total assets		1,962,902		2,101,904
Current liabilities		1,032,758		1,255,297
Noncurrent liabilities		518,762		468,056
Total liabilities		1,551,520		1,723,353
Total joint venture equity	$	411,382	$	378,551
Investments in and advances to unconsolidated joint ventures	$	118,861	$	107,425


	Three Months Ended					Six Months Ended
	June 30, 2023			June 30, 2022		June 30, 2023			June 30, 2022
Revenue	$	530,467		$	594,959	$	879,624		$	979,540
Costs		534,555			564,239		893,950			937,525
Net income	$	(4,088	)	$	30,720	$	(14,326	)	$	42,015
Equity in (losses) earnings of unconsolidated joint ventures	$	75		$	5,613	$	(5,765	)	$	11,211

The Company had net contributions to its unconsolidated joint ventures for the three and six months ended June 30, 2023 of $9.9 million and $14.7 million, respectively and received net distributions from its unconsolidated joint ventures for the three and six months ended June 30, 2022 of $5.4 million and $8.2 million, respectively.

For the three and six months ended June 30, 2023, the Company recorded $7.0 million and $17.0 million of adjustments, respectively on two unconsolidated joint ventures in the Critical Infrastructure segment, one from lower margin change orders in the first quarter resulting in profits being delayed to future periods and the other from a write-off. For the three and six months ended June 30, 2023, this adjustment decreased operating income by $7.0 million and $17.0 million, respectively, net income by $5.1 million and $12.6 million, respectively, and decreased diluted earnings per share by $0.05 and $0.11, respectively.

15.

Related Party Transactions

The Company often provides services to unconsolidated joint ventures and revenues include amounts related to recovering costs for these services. Revenues related to services the Company provided to unconsolidated joint ventures for the three months ended June 30, 2023 and June 30, 2022 were $55.4 million and $51.8 million, respectively and $106.3 million and $99.1 million for the six months ended June 30, 2023 and June 30, 2022, respectively.

For the three months ended June 30, 2023 and June 30, 2022, the Company incurred $39.8 million and $37.2 million, respectively, and for the six months ended June 30, 2023 and June 30, 2022 incurred $78.9 million and $71.0 million, respectively, of reimbursable costs. Amounts included in the consolidated balance sheets related to services the Company provided to unconsolidated joint ventures are as follows (in thousands):


	June 30, 2023		December 31, 2022
Accounts receivable	$	65,134	$	40,320
Contract assets		38,378		30,578
Contract liabilities		13,945		14,906

16.

Fair Value of Financial Instruments

The authoritative guidance on fair value measurement defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (referred to as an “exit price”). At June 30, 2023 and December 31, 2022, the Company’s financial instruments include cash, cash equivalents, accounts receivable, accounts payable, and other liabilities. The fair values of these financial instruments approximate their carrying values due to their short-term maturities.

Investments measured at fair value are based on one or more of the following three valuation techniques:

•

Market approach—Prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities;

•

Cost approach—Amount that would be required to replace the service capacity of an asset (i.e., replacement cost); and

•

Income approach—Techniques to convert future amounts to a single present amount based on market expectations (including present value techniques, option-pricing models and lattice models).

In addition, the guidance establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted market prices in active markets for identical assets and liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are:

Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical assets and liabilities;

Level 2 - Pricing inputs that include quoted prices for similar assets and liabilities in active markets and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the instrument; and

Level 3 - Prices or valuations that require inputs that are both significant to the fair value measurements and unobservable.

The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.

Refer to Notes to Consolidated Financial Statements included in the Company’s Form 10-K for the year ended December 31, 2022 for a more complete discussion of the various items within the consolidated financial statements measured at fair value and the methods used to determine fair value.

17.

Earnings Per Share

The following tables reconcile the denominator and numerator used to compute basic earnings per share (“EPS”) to the denominator and numerator used to compute diluted EPS for the three and six months ended June 30, 2023 and June 30, 2022. Basic EPS is computed using the weighted average number of shares outstanding during the period and income available to shareholders. Diluted EPS is computed similar to basic EPS, except the income available to shareholders is adjusted to add back interest expense, after tax, related to the Convertible Senior Note, and the weighted average number of shares outstanding is adjusted to reflect the dilutive effects of stock-based awards and shares underlying the Convertible Senior Note.

Convertible Senior Note dilution impact is calculated using the if-converted method. In connection with the offerings of the Notes, the Company entered into a convertible note hedge and warrants (see Note 10 Debt and Credit Facilities); however, the convertible note hedge is not considered when calculating dilutive shares given its impact is anti-dilutive. The impact of the bond hedge would offset the dilutive impact of the shares underlying the Convertible Senior Note. The warrants have a strike price above our average share price during the period and are out of the money and not included in the tables below.

Dilutive potential common shares include, when circumstances require, shares the Company could be obligated to issue from its Convertible Senior Notes and warrants (see Note 10 for further discussion) and stock-based awards. Shares to be provided to the Company from its bond hedge purchased concurrently with the issuance of Convertible Senior Notes are anti-dilutive and are not included in its diluted shares. Anti-dilutive stock-based awards excluded from the calculation of earnings per share for the three months ended June 30, 2023 and June 30, 2022 were 3,837 and 11,502, respectively and for the six months ended June 30, 2023 and June 30, 2022 were 1,265 and 8,019, respectively.

The weighted average number of shares used to compute basic and diluted EPS were:


	Three Months Ended				Six Months Ended
	June 30, 2023		June 30, 2022		June 30, 2023		June 30, 2022
Basic weighted average number of shares outstanding		104,907,505		103,675,373		104,856,350		103,722,004
Stock-based awards		883,224		658,198		940,810		729,223
Convertible senior notes		8,916,530		8,916,530		8,916,530		8,916,530
Diluted weighted average number of shares outstanding		114,707,259		113,250,101		114,713,690		113,367,757

The net income available to shareholders to compute basic and diluted EPS were (in thousands):


	Three Months Ended				Six Months Ended
	June 30, 2023		June 30, 2022		June 30, 2023		June 30, 2022
Net income attributable to Parsons Corporation	$	43,241	$	18,295		68,794		38,962
Convertible senior notes if-converted method interest adjustment		554		542		1,106		1,082
Diluted net income attributable to Parsons Corporation	$	43,795	$	18,837		69,900		40,044

Share Repurchases

In August 2021, the Company’s Board of Directors authorized a stock repurchase program to repurchase up to $100.0 million of shares of Common stock. Repurchases under this stock repurchase program commenced on August 12, 2021. Any and all shares of Common Stock purchased by the Company pursuant to the program shall be retired upon

their acquisition and shall not become treasury shares but instead shall resume the status of authorized but unissued shares of Common Stock. The table below presents information on this repurchase program:


	Three Months Ended				Six Months Ended
	June 30, 2023		June 30, 2022		June 30, 2023		June 30, 2022
Total shares repurchased		46,077		275,652		185,475		427,088
Total shares retired		46,077		275,652		185,475		427,088
Average price paid per share	$	43.40	$	36.28	$	43.13	$	36.40

As of June 30, 2023, the Company has $48.3 million remaining under the stock repurchase program.

18.

Segment Information

The Company operates in two reportable segments: Federal Solutions and Critical Infrastructure.

The Federal Solutions segment provides advanced technical solutions to the U.S. government, delivering timely, cost-effective hardware, software and services for mission-critical projects. The segment provides advanced technologies, supporting national security missions in cybersecurity, missile defense, and military facility modernization, logistics support, hazardous material remediation and engineering services.

The Critical Infrastructure segment provides integrated engineering and management services for complex physical and digital infrastructure around the globe. The Critical Infrastructure segment is a technology innovator focused on next generation digital systems and complex structures. Industry leading capabilities in engineering and project management allow the Company to deliver significant value to customers by employing cutting-edge technologies, improving timelines and reducing costs.

The Company defines its reportable segments based on the way the chief operating decision maker (“CODM”), its Chair and Chief Executive Officer, evaluates the performance of each segment and manages the operations of the Company for purposes of allocating resources among the segments. The CODM evaluates segment operating performance using segment Revenue and segment Adjusted EBITDA attributable to Parsons Corporation.

The following table summarizes business segment revenue for the periods presented (in thousands):


	Three Months Ended				Six Months Ended
	June 30, 2023		June 30, 2022		June 30, 2023		June 30, 2022
Federal Solutions revenue	$	762,797	$	537,556	$	1,397,343	$	1,029,185
Critical Infrastructure revenue		593,689		471,165		1,132,609		928,605
Total revenue	$	1,356,486	$	1,008,721	$	2,529,952	$	1,957,790

The Company defines Adjusted EBITDA attributable to Parsons Corporation as Adjusted EBITDA excluding Adjusted EBITDA attributable to noncontrolling interests. The Company defines Adjusted EBITDA as net income (loss) attributable to Parsons Corporation, adjusted to include net income (loss) attributable to noncontrolling interests and to exclude interest expense (net of interest income), provision for income taxes, depreciation and amortization and certain other items that are not considered in the evaluation of ongoing operating performance. These other items include net income (loss) attributable to noncontrolling interests, asset impairment charges, equity-based compensation, income and expense recognized on litigation matters, expenses incurred in connection with acquisitions and other non-recurring transaction costs and expenses related to our prior restructuring. The following table reconciles business segment

Adjusted EBITDA attributable to Parsons Corporation to Net Income attributable to Parsons Corporation for the periods presented (in thousands):


	Three Months Ended				Six Months Ended
Adjusted EBITDA attributable to Parsons Corporation	June 30, 2023		June 30, 2022		June 30, 2023		June 30, 2022
Federal Solutions	$	85,640	$	47,645	$	141,788	$	90,283
Critical Infrastructure		20,936		25,160		45,293		53,475
Adjusted EBITDA attributable to Parsons Corporation		106,576		72,805